The Market Struggles to Find Direction

 

Since last week’s big sell-off, stocks have been almost literally up one day, down the next, and so on and so on.

As of last Thursday, the Dow Jones Industrial Average and the S&P 500 had both lost more than 6% from their early October all-time highs, while the Nasdaq Composite index had slid nearly 10% from its late August record peak—almost in correction territory.

Stocks bounced back Friday, sold off again Monday, rallied big time on Tuesday, and stayed there Wednesday before plunging again Thursday and closing mixed on Friday, with the Dow up and the S&P closing lower for the tenth time in the last 12 trading days. After all the ups and downs and to-ing and fro-ing, all three indexes are slightly above last Thursday’s lows.

The putative cause for last week’s selloff: rising ten-year Treasury yields, which topped out at 3.23% on October 8th. (The closing yield Friday was back to 3.20%.) This week, well, just blame the Fed.

The Fed?

Yes, that “crazy,” “loco” Federal Reserve of President Trump’s fever dreams. The minutes of September’s Federal Open Market Committee meeting, when that body raised the target federal funds rate ¼ point, to 2-2 ¼ percent, used the word “strong” or “strengthen” to describe the economy and labor market four times in the first paragraph.

Furthermore, the minutes declared that future rate hikes “will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s…2 percent objective.” Translation: one more rate hike this year and three more next year are in the cards—just as planned.

Wall Street, which has mostly been begging the Fed to step up the pace of rate increases since Ben Bernanke was chairman, now is having a fit that Jerome “Jay” Powell is finally taking its advice.

The reaction this time reminds me of the “taper tantrum” of May 2013, when Bernanke hinted that the Fed’s extraordinary bond buying (called “quantitative easing”) would end at some point. Everybody knew it would happen eventually, but no one wanted to hear that it would actually take place in their lifetimes.

Ultimately investors got a grip: The S&P has gained 67% since then. If the economy keeps chugging along with moderate inflation and if corporate earnings continue to improve, this market will work its way higher too—until rates rise so sharply they choke the rally off or a recession hits. We’ll reassess if  this sell-off becomes the second official correction within a year.

But for right now, I expect this market to bounce around until investors regain their confidence and decide slightly higher interest rates aren’t the end of the world.

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